Why and how currency rates fluctuate

08Sep

Not for nothing is this question extremely important to beginner traders who have just taken up Forex trading: the knowledge of how and why currency rates change helps greatly reach stable profits at Forex.

The rate of any national currency is defined by the market. The main market factors are import and export. For example, increasing prices of domestic products will result in boosting imports. In its turn, a higher demand for import goods stimulates the growth of the relevant foreign currency. Also, a demand for imports grows proportionally to country's well-being, as a rule, and leads to the reduction in the value of the national currency afterwards.

The same rule works the other way round: outside payments heat worldwide investors' interest to the country's national currency. Since all relations on the foreign exchange arena are reliant on its participants' sentiment, it's logical to suppose that a slump in the country's currency rate makes investors fear that it would continue, that's why they tend to invest in more reliable assets.

Another factor that may influence the currency rate during a low volatility period is analysts' and independent experts' forecasts regarding some decisions of governments, central banks, and owners of large businesses. Sharp movements of currency rates may occur when huge capitals flow from one country to another.

Various large-scale events may also have some impact on currency rates: publications of a country's economic report, national budget, or the end of the fiscal period. Politicians' and bank directors' public statements play an important role in this process.

In some cases, the government may undertake the so-called currency intervention to regulate directly the currency rate. It consists in selling or buying huge amounts of currency on the international market. These actions normally have a significant impact on the currency rate.

Actually, there are a lot of factors influencing currency rates. This article covers only the main ones. Using this knowledge, you can make a forecast regarding future rates of the currency you're interested in. Attempt to predict a price movement, and if you succeed, apply this knowledge in practice.

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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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